We want to alert you to several tax law changes affecting individuals that were enacted Oct. 3, 2008. Most of them apply retroactively. These changes, together with several other popular tax benefits, were included in the controversial financial bail-out legislation to win support from reluctant lawmakers. Although many of the changes will have a modest impact on a relatively small group of taxpayers, they are described below for your general information, as well as their potential applicability. The changes in the alternative minimum tax, however, are likely to have a significant positive impact on an individual's 2008 federal tax picture. These changes are discussed immediately below.
Alternative Minimum Tax Relief
Changes in the alternative minimum tax ("AMT") rules will provide relief for millions of individuals. The first change is an increase in the exemption amounts that are subtracted from an individual's "alternative minimum taxable income" to determine the taxable amount (if any). The exemption amounts for 2008 are $69,950 for joint filers, $46,200 for single filers, and $34,975 for married taxpayers filing separate returns. These amounts, although only slightly higher than in 2007, are substantially higher than the exemption amounts originally scheduled to apply in 2008.
The second broadly applicable AMT change permits taxpayers to use all their "nonrefundable personal credits" (e.g., the dependent care credit) in full to offset both the regular tax and the AMT in 2008. Before this change, which represents a one-year extension of a rule that had expired in 2007, most of the nonrefundable personal credits could not be used to offset the AMT.
Other changes in the new law are aimed at a narrower but nevertheless substantial group of taxpayers. These are the many employees who paid AMT as a result of exercising incentive stock options ("ISOs"), then later suffered losses on selling the stock after its value had declined sharply. This scenario is often called the "phantom income" problem because tax is paid on gains that never materialize.
The new law addresses this problem in two ways. First, it liberalizes a rule, which originally took effect in 2007, designed to allow taxpayers to recover some of the benefit of previously unused AMT credits over a five-year period. The new law provides additional relief by eliminating a phase-out provision in the original rule and reducing the recovery period to two years.
Second, the new law forgives any tax, including interest and penalties, outstanding on October 3, 2008 (date of enactment), if attributable to the minimum tax adjustment for ISOs. Second, for taxpayers who have already paid any interest and penalties that would have been abated under this new rule, such interest and penalties can be used-half in 2008 and half in 2009-to increase the "AMT refundable credit amount" and the minimum tax credit.
Another AMT change may benefit energy-conscious taxpayers. Beginning in 2008, the credit for "energy efficient residential property" can be used to offset the AMT.
Retroactive Extensions of Other Individual Provisions The new law extends through 2009 several provisions that had expired at the end of 2007. These include:
* State and Local Sales Tax Deduction. Allows taxpayers to use state and local sales taxes as itemized deductions in lieu of state income taxes
* Deduction for Qualified Tuition and Related Expenses. Allows an "above-the-line" deduction (i.e., not part of itemized deductions) for certain higher education expenses. The maximum deduction is $4,000 or $2,000, depending on the taxpayer's adjusted gross income (AGI). No deduction is allowed for single filers having AGI above $80,000 or for joint filers having AGI above $160,000.
* Deduction for Classroom Expenses. Allows an "above-the-line" deduction (i.e., not part of itemized deductions) of up to $250 for out-of-pocket expenses of teachers and other educators in grades K-12 for items such as books, supplies, and computer equipment used in the classroom.
* Tax-free IRA Distributions to Charity. Permits direct distributions to charity of up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 701/2. Ordinarily, such distributions would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on charitable contribution deductions.
* Special Provisions Concerning Mutual Funds. The new law extends three rules primarily affecting nonresidents who are not U.S. citizens. One concerns "interest-related" dividends from mutual funds. The second is a "look-through" rule for determining the taxability of mutual fund assets for estate tax purposes. The third concerns the treatment of mutual funds for purposes of the Foreign Investment in Real Property Tax Act ("FIRPTA").
Credit for Residential Energy Efficient Property Extended and Expanded
The new law extends through 2016 the credit for "residential energy efficient property," which was scheduled to expire at the end of 2008. Also, as noted above, beginning in 2008, taxpayers can use the credit against the alternative minimum tax ("AMT"). Moreover, the new law retroactively adds two new types of qualifying property, and, beginning after 2008, removes the credit limit for "qualified solar electric property."
Previously, the credit was based on expenditures for three defined types of qualifying property: qualified solar electric property, qualified solar water heating property, and qualified fuel cell property. The new law adds two more categories: qualified small wind energy property and qualified geothermal heat pump property.
The credit for each type of property is 30% of qualifying expenditures, subject to a dollar limit for each. These limits are as follows:
* $2,000 for qualified solar electric property expenditures in 2008; the limit is removed after 2008.
* $2,000 for qualified solar water heating property expenditures.
* $2,000 for qualified geothermal heat pump property expenditures.
* $500 for each half kilowatt of capacity (not to exceed $4,000) for qualified small wind energy property expenditures.
* $500 for each half kilowatt of capacity for qualified fuel cell property expenditures.
Earned Income Threshold for Child Tax Credit Refundability
The new law reduces the earned income threshold for determining the refundability of the child tax credit for 2008 to $8,500 (from $12,050).
Real Property Tax Deduction for Nonitemizers
In 2008, individuals who do not itemize their deductions may include, as part of the standard deduction, real property taxes of up to $500 ($1,000 for joint filers). The new law extends this rule through 2009.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be relied upon or used, and cannot be relied upon or used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Tuesday, November 11, 2008
Wednesday, October 8, 2008
Charitable Donors benefit from "Bailout" legislation
In addition to the "financial rescue" provisions of the recently enacted Emergency Economic Stabilization Act of 2008 there are a number of tax provisions included in the legislation that will benefit charitable donors. Charitable components included in the legislation are an IRA Rollover Provision, Basis Adjustment to Stock of an S Corporation Making Charitable Contributions of Property, Enhanced Charitable Deduction for Qualified Computer Contributions, Enhanced Charitable Deduction for Food Inventory, Enhanced Charitable Deduction for Contributions of Book Inventory to Schools, Temporary Suspension of Limitations on Charitable Contributions, Increase in Standard Mileage Rate for Charitable Use of Vehicles, and Exclusion from Income of Mileage Reimbursements for Charitable Volunteers.
For a summary of these and other provisions in the Act go to : http://poe.house.gov/UploadedFiles/Tax%20Credits%20in%20Economic%20Stabilization%20Bill_110th.pdf
For a summary of these and other provisions in the Act go to : http://poe.house.gov/UploadedFiles/Tax%20Credits%20in%20Economic%20Stabilization%20Bill_110th.pdf
Thursday, October 2, 2008
New FDIC Rules Regarding Accounts Held in Trusts
In response to the tumult in the financial sector, the FDIC announced Tuesday interim rules effective on September 26, 2008, regarding the extent of FDIC insurance coverage for bank accounts titled in living trusts.
Many people are unaware that the standard $100,000* coverage limit is generally increased for accounts titled in living trusts. Prior to the issuance of the interim rules announced yesterday, that increased coverage was determined by examining the identity of the trust beneficiaries, and the extent of their interest in the trust. Generally, the $100,000 coverage limit was leveraged so that $100,000 of coverage was extended to each "qualifying beneficiary." This meant that a trust for the benefit of parent during life, and payable to children A, B, C, D and E on parent's death, would receive a total of $500,000 in coverage if each of the children met the definition of "qualifying beneficiary" and if each of them had an equal stake in the trust (assuming the accounts titled in the trust at a particular FDIC-insured institution had an aggregate balance of at least $500,000). Because it was necessary to evaluate whether the beneficiaries were "qualified" (the definition of which is beyond the scope of this blog entry), customers were often unsure how much coverage they had, and processing of claims when institutions failed was often delayed. The new interim rules announced yesterday eliminate the need to evaluate the identity of the beneficiaries, and eliminate the need to confirm the extent of the beneficiaries' stakes in the trust. Therefore, the trust above would still receive $500,000 of coverage because there are five beneficiaries, even if A, B, and C were children receiving 90% of the trust (30% each), and if D and E were non-relatives receiving only 10% each.
Although the rules are still somewhat complex with respect to the evaluation of the amount of coverage when a depositor has multiple accounts at one institution, the interim rules greatly clarify the utility of living trusts in leveraging the depositor's FDIC insurance coverage. The full text of the FDIC announcement can be found at http://www.fdic.gov/regulations/laws/federal/2008/08sep26rule.html.
*Effective October 3, 2008, this figure has been temporarily increased to $250,000 and all figures discussed herein should be adjusted accordingly. The increase in coverage is currently set to expire December 31, 2009.
Many people are unaware that the standard $100,000* coverage limit is generally increased for accounts titled in living trusts. Prior to the issuance of the interim rules announced yesterday, that increased coverage was determined by examining the identity of the trust beneficiaries, and the extent of their interest in the trust. Generally, the $100,000 coverage limit was leveraged so that $100,000 of coverage was extended to each "qualifying beneficiary." This meant that a trust for the benefit of parent during life, and payable to children A, B, C, D and E on parent's death, would receive a total of $500,000 in coverage if each of the children met the definition of "qualifying beneficiary" and if each of them had an equal stake in the trust (assuming the accounts titled in the trust at a particular FDIC-insured institution had an aggregate balance of at least $500,000). Because it was necessary to evaluate whether the beneficiaries were "qualified" (the definition of which is beyond the scope of this blog entry), customers were often unsure how much coverage they had, and processing of claims when institutions failed was often delayed. The new interim rules announced yesterday eliminate the need to evaluate the identity of the beneficiaries, and eliminate the need to confirm the extent of the beneficiaries' stakes in the trust. Therefore, the trust above would still receive $500,000 of coverage because there are five beneficiaries, even if A, B, and C were children receiving 90% of the trust (30% each), and if D and E were non-relatives receiving only 10% each.
Although the rules are still somewhat complex with respect to the evaluation of the amount of coverage when a depositor has multiple accounts at one institution, the interim rules greatly clarify the utility of living trusts in leveraging the depositor's FDIC insurance coverage. The full text of the FDIC announcement can be found at http://www.fdic.gov/regulations/laws/federal/2008/08sep26rule.html.
*Effective October 3, 2008, this figure has been temporarily increased to $250,000 and all figures discussed herein should be adjusted accordingly. The increase in coverage is currently set to expire December 31, 2009.
Wednesday, May 7, 2008
Estate Planning & Probate News
In this quarter's Estate Planning and Probate Group eNewsletter, I wrote about how falling interest rates and stagnant or falling asset values are combining to create a unique window of opportunity for gift planning. In particular, the next several months will likely present one of the most advantageous periods in many years for creating a grantor retained annuity trust (GRAT).
Read the entire newsletter and article here: http://archive.constantcontact.com/fs045/1102017010064/archive/1102083698761.html
Read the entire newsletter and article here: http://archive.constantcontact.com/fs045/1102017010064/archive/1102083698761.html
Friday, April 4, 2008
On The Radio
On Thursday, April 3, 2008, I appeared as a guest on the Radio Show "Your Health Matters" on WKXL 1450 AM. The topic for the show was "Divorce and your Mental Health." I discussed the various aspects of a divorce and how effective legal representation during this process is a comfort to many. My colleague, Jennifer Casey, Ph.D. also appeared to speak about mental health issues common to people going through a divorce.
Unquestionably, divorce brings significant stress to a person's life. Not only is the person’s marriage ending, he or she may be involved in extended litigation regarding children, finances, and property. As Dr. Casey explained, even people who have never experienced any mental health issues in the past often have a need to enter therapy as a result of a divorce. To make matters worse, most people are unfamiliar with the laws governing divorces and the courtroom procedure. During the show, I emphasized how the involvement of a qualified divorce lawyer can alleviate some of the stress one experiences during this time.
Much of the law and procedure surrounding divorce in New Hampshire is a mystery to the average married person. During the breaks in the show, the host and I discussed some misconceptions in the law. For example, it is a common misconception that alimony is prohibited in New Hampshire. Another is the assumption that in a parenting dispute, Mom will receive primary parenting responsibility (formerly "custody") of the children because she is a woman. These misconceptions demonstrate the need for more public awareness and education regarding both parties' and children’s rights in a divorce or a parenting dispute.
I am pleased to have been a part of this radio program, and hope that the listeners were able to learn something new about New Hamsphire's divorce law.
Unquestionably, divorce brings significant stress to a person's life. Not only is the person’s marriage ending, he or she may be involved in extended litigation regarding children, finances, and property. As Dr. Casey explained, even people who have never experienced any mental health issues in the past often have a need to enter therapy as a result of a divorce. To make matters worse, most people are unfamiliar with the laws governing divorces and the courtroom procedure. During the show, I emphasized how the involvement of a qualified divorce lawyer can alleviate some of the stress one experiences during this time.
Much of the law and procedure surrounding divorce in New Hampshire is a mystery to the average married person. During the breaks in the show, the host and I discussed some misconceptions in the law. For example, it is a common misconception that alimony is prohibited in New Hampshire. Another is the assumption that in a parenting dispute, Mom will receive primary parenting responsibility (formerly "custody") of the children because she is a woman. These misconceptions demonstrate the need for more public awareness and education regarding both parties' and children’s rights in a divorce or a parenting dispute.
I am pleased to have been a part of this radio program, and hope that the listeners were able to learn something new about New Hamsphire's divorce law.
Wednesday, March 26, 2008
Jane, Stop this Crazy Thing
As a business transaction attorney, I am a first-hand witness to the personal energy, time and emotion that parties put into the purchase or sale of a business. All of these elements can be critical components to completing a transaction; they can, however, also cloud and complicate the decision to terminate negotiations and abandon a transaction.
When parties commence a business transaction it is often with the best intentions, good faith, but only a general agreement of the essential business terms of the deal. As the saying goes, “the devil’s in the details”. As lawyers, accountants, and other professional advisors become involved, the parties are forced to consider the transaction terms with much greater specificity. Moreover, there are almost always terms and conditions that are critical to the transaction that the parties did not consider in their initial discussions.
As the negotiations and preparation of the transaction documents move forward, the opportunity for a “stalemate” on a critical issue increases. Too often, such stalemates lead to protracted and unproductive negotiations. As a result the transaction may fall apart, or one or both of the parties may end-up with a transaction that does not meet their anticipated result.
Ultimately, a purchase agreement is a balance of risk and reward. The buyer or seller of a business must balance the potential reward of the transaction with the risk that the party must bear under the purchase agreement. When a “stalemate” occurs, a party should promptly assess the impact of the issue in question on that party’s risk/reward analysis. If conceding on the issue results in an unacceptable risk to the party (without corresponding reward), the party must either obtain the concession from the other party on that issue, or walk away from the transaction. The sooner this determination can be made the better.
In order to prepare to make decisions during the process of negotiating a transaction, a party should know its risk/reward profile, and prioritize its interests prior to undertaking a transaction. In doing so, with the assistance of its professional advisors, the party will be better prepared to make critical decisions during the negotiation process. A prompt but thoughtful decision may result in a resolution of the disputed issue; or a determination that the transaction is not in its best interest. Either way, the party will avoid an endless run around the treadmill with Astro.
When parties commence a business transaction it is often with the best intentions, good faith, but only a general agreement of the essential business terms of the deal. As the saying goes, “the devil’s in the details”. As lawyers, accountants, and other professional advisors become involved, the parties are forced to consider the transaction terms with much greater specificity. Moreover, there are almost always terms and conditions that are critical to the transaction that the parties did not consider in their initial discussions.
As the negotiations and preparation of the transaction documents move forward, the opportunity for a “stalemate” on a critical issue increases. Too often, such stalemates lead to protracted and unproductive negotiations. As a result the transaction may fall apart, or one or both of the parties may end-up with a transaction that does not meet their anticipated result.
Ultimately, a purchase agreement is a balance of risk and reward. The buyer or seller of a business must balance the potential reward of the transaction with the risk that the party must bear under the purchase agreement. When a “stalemate” occurs, a party should promptly assess the impact of the issue in question on that party’s risk/reward analysis. If conceding on the issue results in an unacceptable risk to the party (without corresponding reward), the party must either obtain the concession from the other party on that issue, or walk away from the transaction. The sooner this determination can be made the better.
In order to prepare to make decisions during the process of negotiating a transaction, a party should know its risk/reward profile, and prioritize its interests prior to undertaking a transaction. In doing so, with the assistance of its professional advisors, the party will be better prepared to make critical decisions during the negotiation process. A prompt but thoughtful decision may result in a resolution of the disputed issue; or a determination that the transaction is not in its best interest. Either way, the party will avoid an endless run around the treadmill with Astro.
Thursday, January 17, 2008
Mediation in Divorce: The Place of Contentment
I wrote an article to increase awareness about the use of mediation in a divorce case as a sensible and cost-effective alternative to litigation in appropriate cases. Parties and their counsel should know what to expect and what not to expect both from the mediator and the mediation process. Informing participants about the process before they participate in mediation may increase the likelihood of settlement. To learn more about the role of mediation in a divorce case, see:
http://nhbar.org/publications/display-news-issue.asp?id=4279
http://nhbar.org/publications/display-news-issue.asp?id=4279
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